Knowing your tax liability
This guide is not legal advice; for that, please consult a tax professional.
Adrian Markey is a chartered accountant and crypto tax specialist based in Northern Ireland. His firm, CryptoTax, was shortlisted for Best New Firm at Practice Excellence 2017, which awards the top accountancy firms in the UK.
The main thing to remember is: keep records!
- Bear in mind that the exchanges that are around now might not be in a few years’ time when you decide to sell.
- Most exchanges will let you download CSV files of your trades.
- If you are feeling lazy, at least try to take a screenshot of recent transactions you have made.
- You can create a separate email address for all your crypto records so that you can quickly email files to yourself for reference later. Please don’t let your security details come anywhere near it though!
Here are some common positions you may find yourself in:
- I’ve bought Bitcoin or another coin or Token
When you buy bitcoin or cryptocurrency, nothing is expected of you at the point of sale. However, you will need a record of the price you bought it at to calculate taxes when you sell it in the future.
- I was given some bitcoin, coins or tokens!
For future tax purposes, make a note of the value of the gift on the date of the gift.
- I’ve just sold some Cryptocurrency for FIAT (GBP, USD etc)
The tax that you might be liable for in this instance is Capital Gains Tax (CGT) – a tax on the profit that is made when you sell something that has increased in value. If tax is due it is only on the gain that you have made, not the entire amount you receive from the sale. This is why keeping records of the purchase value of your cryptocurrency is important. You can also include transaction costs such as transfer fees when calculating your gain.
What else do I need to know?
The annual tax-free allowance for an individual’s asset gains is £11,300 for 2017/18. So if the profit from selling your cryptocurrency, in addition to any other asset gains, is less than this, you won’t have to report or pay tax on it.
However, if you sell up to four times the annual allowance (£45,200 for 2017/18) of crypto-assets, even if you make a profit of less than £11,300, you have to report this sale to HMRC. You can do this either by registering and reporting through Self Assessment, or by writing to them at:
PAYE and Self Assessment
HM Revenue and Customs
An extra tip
For married individuals, you can gift up to £11,300 of assets to your spouse, and use their Capital Gains Tax allowance, thereby getting up to £22,600 of capital gains tax-free annually.
You have two options for how you declare your gains to HMRC:
- As soon as you want after the sale using the ‘real time’ Capital Gains Tax service
- In your annual Self Assessment tax return
HMRC will then contact you with instructions for payment.
I’ve just sold some crypto for other crypto or started trading!
Until you declare yourself as a trader to HMRC (as below), you are considered an investor and your annual gains are subject to Capital Gains Tax as above.
Remember that even if you make less profit than the CGT allowance but have sold more than four times the allowance worth in cryptocurrency, then you have to report this to HMRC as above.
If you have made more than the CGT allowance then you will have to report and pay tax on your gains. Bear in mind that every single trade you make – even crypto to crypto – impacts tax calculations. (To calculate capital gains on a crypto to crypto trade, convert everything into GBP value at the time of the trade. I know.. it’s crazy.) So if you have made a significant number of trades, it is probably worthwhile getting a tax professional just to make sure you get things right.
Advice from HMRC was to consider the tax rules governing the sale of shares (which can be found here and in further detail here) as comparable to the sale of cryptocurrency.
What is significant with respect to CGT is the concept of share matching, roughly translated to a complex example BTC scenario as follows:
I think I’m a trader?! I trade a LOT!
If you trade crypto but are unsure whether your trading constitutes a ‘trade’ in the eyes of HMRC, they suggest looking up the badges of trade to see how many you fulfil. However as this is not clear-cut in any form, it’s probably best to discuss your position with a tax professional, as if you do qualify, you have to set up as a sole trader, after which your gains will become subject to Income Tax, not CGT. Usually, your tax burden will be higher as a result.
I’VE BOUGHT SOMETHING USING CRYPTOCURRENCY
When you spend cryptocurrency in order to purchase a good or a service, this is still considered an asset disposal and has to be assessed as such.
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